Improving Your Credit Score: Common Myths and Misconceptions

By Art Garmon, Ph.D.

Because credit scores have become such an integral part of our financial lives, it is important to understand what they're all about. Unfortunately, though, one survey has revealed that many Americans don't really understand them or how they work. This article will address some of the most common myths and misconceptions about how to improve your credit score.

1. Each credit bureau has its own formula for computing credit scores. When you get your scores from the three different credit bureaus, you will normally see that each of them will vary somewhat, sometimes by as much as 50 points. This variation leads some people to conclude that the various bureaus must be computing the scores differently. In actuality, however, the three bureaus use essentially the same formula. What accounts for the differences in scores is the fact that your files at the different bureaus each contain slightly different information about you. This occurs because some creditors report your information to only one credit bureau, while others may choose to report only to a different bureau.

2. Shopping around for the best loan will lower your credit score. This actually can happen, but only under certain circumstances. Credit bureaus recognize that when consumers seek financing for a major purchase, they will often want to shop around for the best loan rate. Therefore, the bureaus usually do not penalize you for this unless the flurry of credit inquiries continues beyond about 2-3 weeks. After that period it is possible your credit score will be affected. Likewise, if you are shopping around for different types of loans (e.g., mortgage, car, and personal loans) all at the same time, your credit rating is likely to be negatively affected.

3. If you dispute negative items on your credit report, the credit bureau has to remove them. This is another partially true statement. The credit bureaus are required to remove inaccurate information from your credit report. However, if the information that you are disputing is accurate, then they do not have to remove it, no matter how damaging it might be to your credit. For this reason, if you want to remove negative items on your credit report, you will need to be able to substantiate that the information is inaccurate.

4. Paying off your current debt is a the fastest way to raise your credit score. Contrary to what a lot of people seem to believe, this is not true. Your credit rating is determined more by your past payment performance than it is by the current amount of your debt. While you can certainly help your score in the long run by paying down your current debt, the reality is that you won't see much immediate benefit if you have an established history of making late payments. In this case, the best way to have an effect on your credit rating is to begin establishing a new, positive payment history, but doing so will take some time, obviously.

5. Closing old credit accounts will improve your credit score. Closing old credit accounts will usually not help your credit score; in fact, it is more likely to actually lower your score. One of the factors that credit bureaus look at is the ratio of all your outstanding balances to the total amount of credit you have available. Ideally, you want that ratio to be 30% or less, meaning that you are using only 30% of your available credit. Choosing to close a couple of your old credit accounts could increase your ratio considerably, depending on how much available credit you had on those accounts.

6. A credit repair company can erase my bad credit and/or raise my credit score within 1-2 months. Despite what credit repair companies might claim in their advertisements, the reality is that there isn't much these companies can do for you that you can't do for yourself, once you educate yourself. If you would prefer to have someone else do the work for you and if you don't mind paying for it, then working with a reputable credit repair company may be a good idea. However, if you think they have some secret techniques that will clean up your credit like magic, then you'll be wasting your money. Additionally, many credit repair companies are little more than thinly-disguised scams, so be sure to do your research before hiring a particular company.

These are some of the most common myths and misconceptions about how to improve your credit score, and they illustrate how what you don't know can hurt you. Given the great importance of credit scores in our society today, I encourage everyone to educate themselves in this area. There is a lot of good information available about how to improve and protect your credit.

Copyright © 2010 Art Garmon, Ph.D. All Rights Reserved.